Telkom gears up for competition

Telkom’s strong cash-generating abilities – which saw it end the period with R2,3-bn in the bank – resulted in the declaration of an annual dividend of R4 a share and a special dividend of R5 a share, both of which are to be paid to shareholders on July 8.

Off the back of these numbers, Telkom’s share price rose 1,3% to R119 apiece, an all-time high for the stock.

Many Telkom watchers are left wondering whether stellar results like these are sustainable. They have several concerns.

Steps are being taken by the Department of Communications to introduce more competition through the introduction of a second fixed-line network operator (SNO). Internet protocols are being legalisedAnd, furthermore, mobile operators are now able to self-provide infrastructure and not have to rely on Telkom for terminating calls.

Telkom’s primary revenue stream traditionally is in fixed-lines telephony, where growth has been stagnant over the last three years. While this contributes 71,5% of the group’s revenues, the figure is a 4% decline from that posted last year.

In addition, a breakdown of fixed-line revenue (which comprises calls and data – or Internet – traffic) shows the contribution from telephone calls being lower; for local calls (which form the biggest part of network traffic at 32%), the contribution to revenue is down 3%.

Telkom CEO Sizwe Nxasana – who is due to step down at the end of the year – said that the growth of high-speed Internet connections through asymmetrical digital subscriber lines (ADSL) has caused the “cannibalisation of voice revenues”, and that the company will be feeling the pressure on margins.

Data – together with replacing existing networks with those that can carry both voice and data – is where Telkom’s future strategic direction lies, says Nxasana.

Already, the numbers indicate an area of growth; in the year, the company saw a 15,6% increase in data revenue to R5-bn. It reported a 32% increase in managed data network sites to 11 961, and 49% growth in Internet customers to 225 280, of which 10% are broadband.

Says Nxasana: “It is better of us to shoot ourselves in the foot and reduce revenue received per minute than not to move to annuity-based revenue”.

Nxasana says Telkom’s future is in transforming its traditional business, by moving onto an Internet protocol (IP)-based network, aggressively rolling out ADSL and offering converged IP services.

Once that is done, Telkom plans to focus more on its roles as an Internet service provider (where, along with MWEB , it is already a dominant player. It also sees its future in), being a value-added network service operator and a provider of information technology (IT) services.

With the advent of more competition in the telecoms space, says Nxasana, Telkom would like to be the provider of choice for wholesale services:

“If a company is faced with the decision of whether it should build its own network or go the wholesale route, we hope to make our offering more desirable”.

Mobility is another area where the company wants to expand. As a 50% shareholder in Vodacom, Telkom is set to benefit from Vodacom’s planned roll out of wireless fidelity (WiFi) technology, which enables a person with a wireless-enabled computer or personal digital assistant (PDA) to connect to the Internet when in proximity of an access point, according to wikipedia.com.

Nxasana says: “We want to be the number one IT and ISP company. We started in this space three years ago and have 25% of the market. We also want to maintain our position with the mobile operators. The move to a next-generation network competition is going to pave pressure on margins continue to drive prices down to be well positioned for competition.